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Is Amazon serious about getting into pharmacy?

June 19, 2017

Amazon’s Whole Foods deal Friday morning wrecked pharmaceutical stocks to the tune of about $10 billion in combined market cap.

Amazon AMZN, +0.84%  has plans to enter the pharmaceutical industry, according to a mid-May CNBC report. The stocks of pharmaceutical middlemen took a hit Friday on speculation that Whole Foods WFM, +0.90%  could help Amazon disrupt the space.

But how much of a sure thing is an entry by Amazon?

Mizuho analyst Ann Hynes said Monday that she’s “still not convinced.” Stock reaction on Friday was overdone, she said, recommending buying the stocks of pharmaceutical middlemen on weakness.

 

Looking back on about a decade of Amazon earnings calls, Hynes found that the company talked consistently about entering the grocery industry for more than a decade and conducted pilot programs in it.

“It is important to note, recent investor fears of AMZN entering the pharmacy market are driven by unsubstantiated and unconfirmed press reports that AMZN is deciding whether or not the company should enter the pharmacy market, not by AMZN itself,” Hynes said.

But, after examining the company’s earnings calls since 2006, “we did not find any mention of pharmacy in that time frame,” she said.

 

According to the CNBC report, Amazon hired Mark Lyons, formerly of health plan Premera Blue Cross, to create “an internal pharmacy-benefits manager for Amazon employees, which might be later scaled out.”

Lyons has a background as a pharmacist and pharmacy consultant, according to his LinkedIn, and has served as Amazon’s senior manager, pharmacy benefits for three months.

But after speaking with industry contacts, Mizuho’s Hynes said that this role may be more focused on Amazon’s corporate health benefits.

“We believe the reports in May that AMZN is hiring people to break into the pharmacy industry are mostly noise,” she said, adding that the company would be hiring more actively if it had plans in the space.

The U.S. has an incredibly complex and highly regulated pharmaceutical drug system.

But Amazon has previously had trouble breaking into highly regulated markets, Hynes said.

For example, the company hasn’t had much success in China, and has a limited presence in alcohol distribution in the U.S., she said.

Amazon would also likely need to acquire in the sector to be successful in it, Hynes said, but “there are no obvious candidates that provide national scale.”

 

Pharmacy chains like CVS Health Corp. CVS, +0.88% or Walgreens Boots Alliance Inc.WBA, +1.17% or a pharmacy-benefits manager like Express Scripts Holding Co.ESRX, +1.90% — all of which saw shares plummet on Friday — would be major deals, far outpacing the about $14 billion Whole Foods acquisition, Amazon’s biggest one to date.

Pharmacy-benefit managers negotiate drug prices on behalf of health insurers and employers. Currently, a small number of players dominate the market.

But Leerink Partners analyst David Larsen said Amazon could buy a smaller pharmacy-benefit manager business, such as MedImpact, Navitus or even the Envision business from RiteAid Corp. RAD, +6.67% if the Walgreens acquisition of RiteAid doesn’t go through.

“If AMZN decides to acquire RAD or a midsize PBM, we believe that AMZN could become more of a threat to CVS and WBA,” Larsen said on Friday. “We do not believe that this initial transaction [is] a material threat, but the longer-term implications are material in our view.”

 

And although Whole Foods could give Amazon a physical retail presence, the grocery chain only has about 460 stores in 45 states, Larsen said.

Adding pharmacies to those locations wouldn’t necessarily be enough to compete with CVS and WBA, he said, though a mail-order pharmacy business could help alleviate that.

Another analyst, UBS’s Michael Cherny, also questioned on Friday whether acquiring Whole Foods would bolster an Amazon pharmacy entry.

Whole Foods sells vitamins and other wellness products, but it doesn’t have expertise in pharmacy, Cherny said, suggesting that there’s no link between the Whole Foods deal and Amazon’s possible interest in pharmacy.

Amazon did not immediately return MarketWatch’s request for comment.

Grocery-store shares dropped sharply on Friday. Wal-Mart Stores Inc. WMT, +0.61% stock fell 4.7%, Costco Wholesale Corp. COST, -2.45% stock dropped 7.2%, Target Corp. TGT, -1.91%  stock fell 5.1% and Kroger Co. KR, +1.44%  stock dropped 9.2%.

Pharmaceutical middlemen also took a hit. CVS stock fell 3.8%, McKesson Corp.MCK, +1.09%  stock declined 2.5%, Amerisource Bergen Corp. ABC, +1.25%  stock dropped 2.0%, Cardinal Health Inc. CAH, +1.61%   stock fell 1.3% and Walgreens shares plummeted 5.0%. Express Scripts shares declined a scant 0.1%, compared with a 0.05% rise in the S&P 500 SPX,

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